Bit Who? 5 Things You Need to Know About Bitcoin

Bitcoin is slowly but surely finding its way into our lexicon, our news reports, and maybe even our wallets. So what is Bitcoin? How does it work? How do you get Bitcoin? Should you be using it? Should you wait? What the hell are you talking about, Dayna?

1. Bitcoin is both a currency and a payment network: Merchants such as Overstock.com and the Sacramento Kings (and thousands of others) accept Bitcoin as a means of payment. There are dozens of new companies jumping on board and accepting the currency each day. The Bitcoin payment network is distributed globally, and is highly resistant to hacking and most other bad behavior.

2. Bitcoin is truly the first viable monetary system designed with the Internet in mind: Bitcoin was not created by any government or company. It was created as "open source" technology (meaning anyone can inspect the network's code for flaws or vulnerabilities, and anyone can recommend improvements to the infrastructure). Additionally, anyone can send Bitcoins directly to anyone else; it's a network like Skype or email that is able to transmit funds globally and nearly instantaneously for a fraction of what banks or other payment providers charge.

3. As a speculative investment, Bitcoins are extremely volatile: At the beginning of 2013, the cost to buy one Bitcoin on a public Bitcoin exchange was around $13 and by December it had gone to over $1,200, ending the year in the $900 range. Some speculators did very well in this market, but price fluctuations of 20 percent or more in the course of a day are not uncommon.

4. Venture capital is starting to pour into Bitcoin startups: Bitcoin startups were on the radar of venture capitalists in 2013. The most notable investment was the December investment of $25 million that Andreessen Horowitz, a venture capital firm, made in Coinbase, which provides Bitcoin wallets and merchant services.

5. The most interesting Bitcoin uses are yet to come: While much of the speculative aspects of Bitcoin grabbed headlines in 2013, the most interesting aspects of the technology are yet to come. In some ways, the Bitcoin network in 2014 parallels the state of the Internet itself around 1994, and is filled with similar promise. A new generation of entrepreneurs is currently working on creating companies and capabilities based on this new opportunity, which will play out over the next several years.

Still confused? Bitcoin is not for everyone just yet. Some say Bitcoin is the future of currency and others call it a Ponzi scheme (or worse). According to Carfi, "The truth is more nuanced, with some aspects of Bitcoin poised to fundamentally redefine aspects of international economic activity, while others clearly risk being brought down by their own hype. "

Asked about government financial infrastructures around the world and how Bitcoin will fit in with these systems or redefine them, Carfi said, "Certain countries, such as Thailand and Iceland, historically have been hostile toward Bitcoin. BitLegal is tracking Bitcoin's status in many countries around the globe."

The United States has taken a more tempered approach. One of the biggest areas of concern and interest in the US has been how Bitcoin activities will be taxed. Currently, the IRS has not given any formal guidance in this area, although individuals on sites like Forbes and representatives from the H&R Block Tax Institute have offered their speculation.

The bottom line is that Bitcoin is rapidly evolving. Carfi recommends that you do your own investigation into whether this new currency is right for you or your business. Or decide to take a wait and see stance with me...